3 Key Takeaways of Recent ITAT Ahmedabad Deemed Dividend Case Law of 2025

The treatment of inter-corporate loans and advances under Section 2(22)(e) of the Income-tax Act, 1961 has been one of the most litigated issues in Indian tax law. Commonly referred to as the “deemed dividend” provision, this section was introduced to curb the practice of closely-held companies distributing profits in the guise of loans or advances to shareholders, thereby avoiding dividend distribution tax.

However, the provision has often been used by tax authorities to bring within its ambit transactions that are purely commercial and bona fide in nature. The recent decision of the ITAT Ahmedabad SMC Bench in the case of Mateshwari Bus Operations Pvt. Ltd. v. ITO (TDS), Ward 2, Ahmedabad (ITA No. 1073/Ahd/2025, AY 2015–16, order dated 29.09.2025) has once again reaffirmed the settled position of law:

• Deemed dividend provisions apply only when the payment is made to a shareholder.
• Section 194 (TDS on dividends) is applicable only when the payment is made to a shareholder.
• Commercial expediency is a valid and critical ground to justify such transactions.

Facts of the Case

• The assessee, Mateshwari Bus Operations Pvt. Ltd. (MBOPL), advanced a loan of ₹20,00,000/- to its group concern Tak Bus Operations Pvt. Ltd. (TBOPL) during FY 2014–15.
• TBOPL was a newly incorporated company, formed for the purpose of executing a contract awarded by the Ahmedabad Municipal Transport Service (AMTS) for procurement and operation of 100 city buses.
• TBOPL had no independent financial standing and required urgent funds for margin money, bank guarantees, and vendor advances. MBOPL, being an established group company, arranged these funds.
• The loan was fully repaid within the same financial year.
• The Assessing Officer treated the loan as deemed dividend u/s 2(22)(e) and held the assessee in default for not deducting TDS u/s 194. A demand of ₹3,92,000/- was raised u/s 201(1) and 201(1A).
• The CIT(A) dismissed the assessee’s appeal ex parte.
• On further appeal, the ITAT ruled in favour of the assessee and deleted the demand.

Relevant Law

Section 2(22)(e): Deemed Dividend

“Any payment by a company, not being a company in which the public are substantially interested, of any sum… by way of advance or loan to a shareholder, being a person who is the beneficial owner of shares… holding not less than 10% of the voting power, or to any concern in which such shareholder is a member or partner and in which he has a substantial interest… shall be treated as dividend to the extent of accumulated profits.”

Section 194: TDS on Dividends

“The principal officer of an Indian company… shall, before making any payment by any mode in respect of any dividend or before making any distribution or payment to a shareholder… deduct income-tax at the rate of 10%.”

Hon’ble ITAT’s Ahmedabad’s Findings

Recipient not a Shareholder:

The Tribunal noted that TBOPL was not a registered shareholder of MBOPL. Since the first condition of Section 2(22)(e) itself was not satisfied, the provisions could not be applied.

Commercial Expediency:

The loan was advanced purely to enable TBOPL to meet obligations under the AMTS contract. The Tribunal accepted that the funding was commercially expedient, temporary in nature, and repaid within the same financial year.

TDS u/s 194 Not Applicable:

Section 194 requires TDS deduction only when dividend is paid to a shareholder. Since TBOPL was not a shareholder, the assessee had no obligation to deduct tax.

Reliance on Precedents:

The Tribunal relied on two binding precedents:

CIT v. Daisy Packers Pvt. Ltd. (2013) [Gujarat High Court]

“If the assessee-company does not hold a share in the other company from which it had received deposit, then it cannot be treated to be a deemed dividend under section 2(22)(e) of the Act.”

DCIT v. Cama Hotel Pvt. Ltd. [(2015) [ITAT Ahmedabad)]

“It is not in dispute that the appellant is not a shareholder in either of the companies which advanced loans… respectfully following the decision of the ITAT Special Bench in ACIT v. Bhaumik Colour Pvt. Ltd., addition of deemed dividend cannot be made in the hands of the appellant.”

Principles Emerging from this Deemed Dividend Case Law

From this case and earlier deemed dividend case laws, the following principles are clear:

Recipient must be a Shareholder:

Deemed dividend u/s 2(22)(e) can be taxed only in the hands of a shareholder. If the recipient is not a shareholder, the provision fails.

TDS u/s 194 applies only to Shareholders:

The obligation to deduct TDS arises only when dividend is distributed to a shareholder. Payments to non-shareholders (even if falling under 2(22)(e)) do not attract Section 194.

Commercial Expediency is an important factor:

If a loan/advance is made for business necessity, such as margin money for loan disbursement, securing government contracts, or protecting group reputation, it strengthens the assessee’s defence.

3 Key Takeaways from the Judgement

This deemed dividend case law highlights three important takeaways:

Strict Scope of Section 2(22)(e)

The ITAT reaffirmed that Section 2(22)(e) is a deeming provision and must be interpreted strictly. It cannot be extended to cases where the recipient is not a registered shareholder. The Tribunal relied on CIT v. Daisy Packers Pvt. Ltd. and DCIT v. Cama Hotel Pvt. Ltd., both of which had held that unless the borrower itself is a shareholder, the loan cannot be taxed as deemed dividend. This judgment supports the principle that the provision is meant to curb tax avoidance through disguised dividends, not to cover genuine commercial transactions.

TDS under Section 194 applies only to Shareholders

Section 194 clearly states that TDS is to be deducted “before making any payment… to a shareholder.” The Ahmedabad Bench has again clarified that TDS liability cannot be fastened where payment is made to a non-shareholder, even if such payment could be examined under Section 2(22)(e). This distinction is critical for defending cases where the Revenue alleges failure to deduct TDS. The statutory wording itself restricts its applicability, and the Tribunal has recognized this in line with settled law.

Commercial Expediency is a Valid Defence

The Tribunal placed emphasis on the fact that the loan was advanced for meeting urgent project requirements under the AMTS contract. The loan was temporary, facilitated timely execution of a government contract, and was repaid in the same financial year. This underscores the importance of commercial expediency as a factor that demonstrates bona fide business intent, distinguishing genuine funding support from distribution of profits.

My Take

The decision in Mateshwari Bus Operations Pvt. Ltd. reaffirms that deemed dividend provisions under Section 2(22)(e) must be applied strictly, and not to genuine commercial loans. Importantly, TDS under Section 194 arises only where payment is made to a shareholder. This case adds another strong precedent in the long line of favourable deemed dividend case laws.

This matter was argued by the author before the Hon’ble ITAT Ahmedabad. The ruling not only provided relief to the assessee but also reaffirmed the principles consistently laid down by higher judicial forums on deemed dividend case laws